When applying for a loan, particularly a bridging loan or mortgage, having a clear exit strategy is essential. An exit strategy outlines how you plan to repay the loan or transition to a different financing solution. In this blog, we will explore five types of exit strategies to consider, ensuring you make informed decisions that align with your financial goals.
1. Sale of Property
One of the most common exit strategies for both bridging loans and mortgages is the sale of property. This strategy involves selling the property that was purchased with the loan funds. It is particularly relevant for borrowers who have taken out a bridging loan to purchase a new home before selling their current one.
Benefits
- Quick repayment: The sale of property can quickly generate the funds needed to repay the loan.
- Potential profit: If the property has appreciated in value, the sale can result in a significant profit.
Considerations
- Market conditions: The success of this strategy depends on the real estate market conditions. A slow market could delay the sale and extend the loan period.
- Selling costs: Factor in costs such as real estate agent fees, marketing expenses, and legal fees.
2. Refinancing
Refinancing involves replacing your current loan with a new one, typically with more favourable terms. This strategy can be used for both bridging loans and mortgages.
Benefits
- Lower interest rates: Refinancing can potentially secure a lower interest rate, reducing monthly payments.
- Improved cash flow: By extending the loan term, monthly payments can be reduced, improving cash flow.
Considerations
- Qualification: You must qualify for the new loan based on your credit score, income, and debt levels.
- Costs: Refinancing may involve costs such as application fees, valuation fees, and legal fees.
3. Business or Investment Income
For borrowers who have business or investment income, using these funds to repay a loan can be an effective exit strategy. This is particularly relevant for investors who have taken out a bridging loan for a property development project.
Benefits
- Steady income: Business or investment income can provide a steady stream of funds to service the loan.
- No need to sell assets: This strategy allows you to retain ownership of the property or investment.
Considerations
- Reliability: Ensure that the business or investment income is reliable and sufficient to cover the loan repayments.
- Market fluctuations: Investment income can be affected by market fluctuations, which could impact your ability to repay the loan.
4. Cash Reserves
Using cash reserves as an exit strategy involves setting aside funds specifically for repaying the loan. This strategy is suitable for borrowers who have significant savings or liquid assets.
Benefits
- Immediate repayment: Cash reserves can be used to repay the loan immediately, avoiding interest accumulation.
- Financial security: Maintaining cash reserves can provide a safety net for unforeseen expenses.
Considerations
- Opportunity cost: Using cash reserves for loan repayment may result in missed investment opportunities.
- Discipline: Requires disciplined savings habits to ensure sufficient funds are available when needed.
5. Sale of Other Assets
If selling the property is not an option, consider selling other assets to repay the loan. This could include stocks, bonds, or other real estate holdings.
Benefits
- Flexible options: Allows you to choose from a range of assets to generate the required funds.
- Potential for profit: Selling appreciated assets can result in a profit, aiding in loan repayment.
Considerations
- Market conditions: The value of assets can fluctuate, affecting the amount of funds generated.
- Timing: The timing of the sale is crucial to maximise returns and ensure funds are available for loan repayment.
Use Case: Leveraging a Bridging Loan for a Seamless Transition
Consider Sarah, a homeowner in Sydney who wants to purchase her dream home but hasn’t sold her current property yet. She opts for a bridging loan to secure the new property while her current home is on the market. Sarah’s exit strategy is to sell her existing home to repay the bridging loan.
After three months, Sarah successfully sells her current home at a favourable price. The proceeds from the sale are used to repay the bridging loan, and she transitions to a standard mortgage for her new property. By having a clear exit strategy in place, Sarah was able to navigate the transition smoothly without financial stress.
Conclusion
Choosing the right exit strategy when applying for a loan is crucial for financial stability and success. Whether it’s selling property, refinancing, utilising business or investment income, using cash reserves, or selling other assets, each strategy has its benefits and considerations. By understanding these options, you can make informed decisions that align with your financial goals and circumstances.
For more information on bridging loans and how they can help you achieve your property goals, visit Funding’s Bridging Loans page.